Oil trades near US$46 amid Nigeria force majeure, product overhang

[NEW YORK] Oil traded near US$46 a barrel in New York as the market weighs a force majeure declared by Exxon Mobil Corp on crude shipments out of Nigeria against excess US oil and product inventories.

Futures fluctuated between losses and gains in New York amid low volume trading. Exxon declared force majeure on shipments of Nigeria's biggest crude export grade. China processed a record amount of crude in the first half of 2016 as its gross domestic product in the second quarter exceeded estimates, adding support to the market.

Meanwhile, US crude production last week rose for the first time since early June and gasoline and distillate stockpiles climbed, according to the Energy Information Administration.

"We have bullish news. We have bearish news. It's a moody market," Phil Flynn, senior market analyst at Price Futures Group in Chicago, said by telephone.

"The big bear case is we have this flood of product and it's going to take some time to overwork that."

West Texas Intermediate crude for August delivery rose 38 US cents, or 0.9 per cent, to US$46.06 a barrel at 12:02 pm on the New York Mercantile Exchange after earlier dropping to US$45.05.

The grade climbed by 93 US cents to settle at US$45.68 on Thursday. Total volume traded was about 4 per cent below the 100-day average.

Brent for September settlement climbed 47 US cents, or about 1 per cent, to US$47.84 a barrel on the London-based ICE Futures Europe exchange. The contract increased US$1.11 to end the session at US$47.37 on Thursday. The global benchmark crude traded at a US$1.04 premium to WTI for September delivery.

"The market seems to be at the point where it's weighing its options whether or not it can move higher," Harry Tchilinguirian, head of commodities research at BNP Paribas SA in London, said by telephone.

"There's still a bit of uncertainty in Nigeria, but then again, the situation in Nigeria isn't something new."

Force majeure - a legal clause that allows Exxon to stop shipments without breaching contracts - was declared on Qua Iboe crude after "a system anomaly observed during a routine check of its loading facility," the company said in an e-mailed statement Friday.

The Niger Delta Avengers, a militant group that has targeted oil installations in Nigeria this year, claimed earlier this week that it attacked the Qua Iboe crude pipeline. Qua Iboe is the third Nigerian crude grade to be declared under force majeure currently, joining a force majeure declared on Brass River in May and Forcados in February, according to information from companies compiled by Bloomberg.

China processed a record amount of crude on a daily basis in the first half of 2016 as plants boosted operations after getting import licenses. The country's domestic oil production dropped 4.6 per cent to 101.59 million metric tons in the period, the lowest for that period since 2012, according to data from the National Bureau of Statistics on Friday.

The world's second-biggest economy's gross domestic product rose 6.7 per cent in the second quarter from a year earlier, compared with 6.6 per cent seen by economists Bloomberg surveyed.

Oil has traded between about US$44 and US$51 a barrel since early May and has climbed from a 12-year low in February amid a string of supply disruptions including attacks in Nigeria. While there's still a consensus that the worst of the oil glut is over, the International Energy Agency cautioned this week that "the road ahead is far from smooth" amid seasonal weakness in demand and the return of some halted supply.

Analysts including BNP Paribas SA and JBC Energy GmbH warned prices may sink toward US$40, due in part to seasonal demand weakness. Crude fundamentals are weaker than many realise, according to Julius Walker, senior consultant at JBC Energy in Vienna.

US inventories are brimming after two years of surplus production and demand for gasoline - the key driver of prices in summer - is proving to be disappointing. Stockpiles of the fuel rose 1.21 million barrels last week and refiners reduced operating rates by 0.2 percentage points to 92.3 per cent of capacity, according to the Energy Information Administration.

"We haven't sorted out our excess supply problems," Mr Tchilinguirian said. "Unless you see visible reductions in inventories and more pronounced declines in US shale production, the market will have to go back to US$40."

BLOOMBERG